Investment trust focus: City of London

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AS its name suggests, City of London Investment Trust is more British belt and braces than Silicon Valley jeans and sneakers. It is a traditional trust, built on solid investment values. Its emphasis on dividend growth, capital stability and its portfolio of familiar UK blue chips has found resonance with a generation of investors and it now sits at around £1.7 billion in size.

Its latest results, released on 21st September, delivered no surprises, exactly as its investors prefer. The trust continued to grow its dividend for a 55th consecutive year, confirming its status as a ‘dividend hero’, a coveted badge from the Association of Investment Companies given to trusts with a strong track record of growing payouts to shareholders.

However, the trust has had to dip into its reserves – £14.4 million last year and £8.1 million this year after an “avalanche of dividend cuts, cancellations and omissions”. This is a significant advantage of the investment trust structure, which allows dividends to be held in reserve in buoyant years to support payouts in lean years. This is a good example of this process in action.

Capital performance has been more difficult. Its defensive portfolio, focused on solid UK blue-chips such as Unilever, Diageo, Rio Tinto or BAE Systems has been deeply unfashionable at a time when investors have wanted high growth technology (in 2020) or beneficiaries of the recovery (in 2021).

However, its investors often aren’t in it for the capital growth. The rising dividend makes it a natural choice for those who want an income that beats inflation and grows reliably over time. It also places a good old-fashioned emphasis on value for money. Its ongoing charge is just 0.36%, around half that of the average active fund and closer to the cost of a tracker.

Today, the trust is focused on UK financial companies, such as asset manager M&G and insurer Phoenix Group with long-standing manager Job Curtis believing that UK financials look poorly rated compared to their international peers. He also likes the supermarkets, holding Tesco and Morrisons. The recent bid for Morrisons, he says, shows international buyers believe there is value in the sector. He sold out of Renishaw and Spirax Sarco during the year, where share prices had run too high.

It is worth mentioning that the trust’s largest holding is in British American Tobacco, which makes Dunhill and Rothmans. It also lists Imperial Brands (owner of Gauloises and Rizla) among its top ten holdings. This will not suit everyone, with tobacco firmly off many investors’ wishlists on environmental and social grounds. For Curtis, the appeal is the high yields, strong cash flow and low valuations, but he recognises it is a controversial choice at a time when many investors are increasingly focused on environment, social and governance metrics. It’s a clear sign of his determination to stick to the process that has served the trust well over many decades.

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